Chinese economy is unstable

Presidents Obama and Bush and the U.S. Congress have done all but nothing to forestall another financial collapse. Many economists, including myself, believe another financial crisis is imminent. However, there is a more likely precipitant to a slump, namely the instability and contradictions of the Chinese economy.

China has received enormous attention in the last decade. Many have predicted China will come to dominate the global economy in the next several years. Even more have marveled at China's ability to seemingly avoid severe setbacks from the Great Financial Crisis of 2007-8 and predict that it will be China that will pull the U.S., Europe, and the global economy out of the current slump.

All of these are overoptimistic, exaggerated, and to some degree even illusionary.

It is high time for Americans to begin to understand the contradictions of the Chinese economy and the likelihood these contradictions cause a global economic slump in the near future.

There are several foundational contradictions recently brought to light in a symposium held in the pages of “The International Economy” (Winter 2010 issue). More than 50 economists were asked about the sustainability of Chinese economic growth and its ability to be the engine of global economic activity. There was tremendous doubt expressed.

One striking fact is the Chinese economy is nearly 50 percent investment spending, and 34 percent consumption. Comparably, the U.S. is less than 20 percent investment spending and nearly 70 percent consumption. The high level of investment spending is an imminent source of instability. Overinvestment is generating new capital stock that remains unutilized. Economists call this overcapacity. NYU economist Nouriel Roubini states visitors will recognize Chinese overcapacity “in sleek but empty airports and bullet trains” and “highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.”

The overcapacity is characteristic of industry after Chinese industry. New capital lies idle. Investment projects fail to realize profits.

China is also radically dependent on its export markets. Exports make China highly dependent on other economies across the globe, especially the U.S., Europe, and Japan. Recognizing this interdependency and the brutal decrease in exports in 2007-8, the Chinese government in November 2008 injected $585 billion stimulant and urged Chinese banks to aggressively loan money at low interest rates. This has led to municipalities in China taking out massive loans, incurring massive debt and engaging in urban expansion and real estate speculation.

In other words, China is currently in a very severe real estate bubble.

The stimulus added to China's overcapacity. This alone should correct any illusions of the Chinese state being economically wise visionaries. The Chinese state has too often been economically irresponsible.

Indeed, the privatization of state production, according to Peter Kwong, has been a practice of pure “cronyism”: 90 percent of the richest 20,000 Chinese are “related to senior government or Communist Party officials.”

The cronyism is endemic to the Chinese economy. It is horrifically illustrated by the disposition of hundreds of millions of Chinese. According to geographers Richard Walker and Daniel Buck, this disposition of Chinese citizens has occurred via cronyism and the great giveaway of state enterprises to friends and family of Chinese officials. Village enterprises have collapsed. And the great economic expansion has totally transformed countryside farming.

The result has been the disposition of hundreds of millions of Chinese, who have been automatically transformed into a massive labor force who too often suffer extreme exploitation by Chinese subcontractors to Japanese, European, and American companies. For example, PUMA has its workers produce enough sneakers in a mere five days and two hours to pay the entire year of salaries to the factory workers. The remaining 358 days are not pure profit — transportation and marketing costs reduce the profits for PUMA to 50 percent.

Horrendous labor conditions, management brutality, low pay, no benefits have been widely reported throughout China. The recent mass incidences of protests verify the socioeconomic injustices of China. In 2010 and 2011 alone there were more than 400,000 mass petitions, demonstrations, strikes, riots, etc.

The contradictions of the Chinese economy — overinvestment, export dependency, super-exploitation, low consumption, low wages, lack of benefits and income inequality — assure the unsustainability of the Chinese miracle.

When the miracle ends, it is likely the U.S. and global economy will fall into an economic slump.